Despite generating significant buzz with Sydney Sweeney's controversial marketing campaign, American Eagle Outfitters (AEO) faces fundamental challenges that celebrity endorsements can't fix, according to Bank of America analysts, who downgraded the stock to "Underperform."
Earlier this month, the "Euphoria" star's fall denim campaign sparked a meme stock mania. Moreover, American Eagle stock gained 23% on Aug. 4, after President Trump praised the marketing on Truth Social.
Bank of America believes both the American Eagle namesake brand and the Aerie sub-brand lack pricing power to navigate potential tariffs effectively. The firm expects a prolonged recovery following first-quarter assortment issues, noting uncertainty around whether American Eagle's non-denim products can gain traction. At the same time, Aerie faces secular challenges in intimates and swimwear categories.
"Pulling back on promos could curtail traffic, and we see risk that Aerie could pull back on store opening plans next year if the retail environment remains tough," analysts warned, setting a $10 price target that implies 22.5% downside.
American Eagle expects second-quarter revenue to fall 5%, comparable sales to drop 3%, and gross margins to compress year-over-year (YoY). The retailer already took a $75 million write-down on spring and summer merchandise after pulling full-year guidance due to slow sales and steep discounting.
While Sweeney's campaign generated the highest Google search interest for American Eagle in over 20 years, translating online buzz into sustainable sales growth remains uncertain. With shares down 27% year-to-date (YTD), the retailer's merchandising missteps and macroeconomic headwinds present deeper challenges than celebrity marketing can address.
Is American Eagle Stock a Good Buy Right Now?
American Eagle's operational challenges run deeper than the Bank of America downgrade suggests. During the fiscal Q1 earnings call, management acknowledged execution failures beyond external factors, with CEO Jay Schottenstein admitting "we did not execute to our potential" despite broader macro headwinds.
The company's inventory management revealed critical weaknesses. American Eagle took a massive $75 million write-down on spring and summer merchandise that failed to resonate with customers, particularly in Aerie's soft apparel categories like fleece tops and shorts.
President Jen Foyle described these as "big fashion ideas for the season [that] simply did not resonate with our customer," indicating a fundamental disconnect between merchandising strategy and consumer preferences.
Alternatively, traffic increased across all brands and channels, suggesting customer engagement remains strong despite conversion issues. American Eagle maintained and even gained market share in key categories, with intimates showing sequential improvement and the OFFLINE by Aerie activewear line demonstrating positive growth momentum.
Management implemented structural changes to prevent future missteps, including "increased rigor into our buying process" with greater cross-functional partnership and oversight. Supply chain diversification efforts continue, with China sourcing exposure dropping below 10% this year and fall/holiday seasons reaching low single digits.
The company's balance sheet remains relatively healthy with $620 million in total liquidity, and management returned $253 million to shareholders through buybacks and dividends in Q1. While American Eagle paused full-year guidance pending greater visibility, the swift corrective actions and strong customer file growth (high single digits for AE, mid-single digits for Aerie) suggest recovery potential exists if execution improves.
Is AEO Stock Undervalued Right Now?
American Eagle stock is down 22% over the last 10 years and is down 66% from its all-time high. Moreover, according to consensus estimates, its adjusted earnings per share are forecast to narrow from $1.52 in 2024 to $1.27 in 2028.
Of the 13 analysts covering AEO stock, one recommends “Strong Buy,” nine recommend “Hold,” one recommends “Moderate Sell,” and two recommend “Strong Sell.” The average 12-month target price for AEO stock is $11.36, below the current price of $13.
